Lease and Cash Payment Essay - Essay Prowess

Lease and Cash Payment Essay


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You aren’t selling a “lease” or a “payment”…you are selling a cash alternative

Leasing is in essence a cash alternative. There are instances where your organization may after a cost analysis consider cash purchases as draining off the available working capital especially in the case of long-term investments. As such, cash purchases for long-term investments may place your organization in a situation where it is unable to fund its day to day operations. Therefore, leasing as a cash alternative works towards ensuring your organization is able to conserve its capital by employing the lessor’s cash to gain cash savings or improved productivity to generate capital to pay for on-going costs. Leasing as a cash alternative therefore enables your firm to advance its cash management portfolio while at the same time creating greater operational flexibility and capacity. It is important to note that not only does leasing as a cash alternative free up the much needed working capital, but it also allows for your firm to arrange for affordable and predictable payment structure.

Lease payments and structures

It is estimated that nearly 80% of US firms lease the equipment they use to run their operations and more than 90% of these firms underscore that they would further lease equipment if the organizational situation so requires. One of the greatest advantages associated with leasing are the different financing options available. As a matter of fact, it is possible for your organization to virtually lease anything needed to ensure sustainable organizational development.

Deferred payments

Leases as cash alternatives provide you with very flexible and convenient modes of payment depending on the lease structure. For the deferrals structure, it is possible for your organization to acquire an extended non-standardized form of payment terms. Lease transactions with a clear deferral feature allow your company to start paying up rental payments to up to 90 days after the lease agreement has been entered into. This is especially the case where you as the lessee seek to set up assets prior to the approval of your capital budget or at the close of the year where it is possible for your organization to enjoy favorable tax treatments.

Fair Market Value

The FMV lease type offers your organization with a payment option allowing for the purchase of leased assets at the end of the lease agreement and at the fair market value. This is of great advantage to your firm especially in instances where the IRS considers a lease as an operating lease. During the lifetime of a FMV lease agreement, your organization can continue to deduct these monthly payments. This is especially helpful in cases where your firm seeks to upgrade its assets prior to the expiration of the lease agreement. The advantages with the payment mode of this lease structure is that one can renew the lease, purchase the asset at FMV at lease end, return the asset or deduct monthly payouts as an operating expense during the course of the lease agreement.

Full pay out

This type of lease allows for the lessor to transfer the ownership of the asset in question to your organization after the expiration of the lease agreement. As such, it is quite similar to a bank client loan arrangement. After the end of the lease agreement your firm will be in a position to purchase the said asset at a nominal price. This type of lease structure requires your firm to capitalize such an asset.

Capital lease

Capital lease present different financing structures compared to the common operating lease. For a capital lease to appear in your firm’s financial statements, the asset will revert ownership to your organization at lease agreement’s end. The lease term will have to exceed at least 75% of the assets life. The minimum lease payouts exceed 90% of the assets FMV.